Mauritius in the New World Order

Mauritius’ efforts may be better directed to increase its exports of both goods and services, overcoming the international trade market condition fraught with multiple risks – By Anil Gujadhur

There have been persistent attacks in past years against trade in services involving small countries such as Mauritius. The attacks have come mainly from advanced economies in the West. The latest example is describing our provision of international financial services as a “tax haven” activity. It is clear that they are seeking to increase their trading space at the expense of others.

The EU has not blacklisted us but has kept us on a grey list in this respect. In other words, we are caught up in a web of compliance with rules they set out, failing which we fall into the black list. In simple terms, we have to apply standards of conduct of business to their satisfaction and remain under their watchful eyes lest we encourage their companies to do business with us and thus help them avoid their paying taxes in those jurisdictions. The irony is: there are quite some financial centres in Europe doing even more sophisticated business than we do in that regard but they appear neither on the EU’s grey nor on its black list.

It is like a sword of Damocles hanging over our heads. ‘Big Brother’ is watching us. Any businessman would tell you that it acts like a serious deterrent and impediment to engaging in any trade if you are conscious at all times of being watched over your shoulders, lest you commit a crime of lèse-majesté, with drastic consequences to follow. Yet, we are not doing anything more in trade in financial services which are not being done in those advanced economies.

Mauritius expanded into trade in international services because it experienced a falling scope in the export of goods to balance its external account for receipts and payments of foreign exchange, also called the Balance of Payments account. Beginning in the 1970s, we diversified our export base with textiles and garments. Enhanced exports of goods became the most important engine of our economic growth and so remained for over three decades.

As we did not graduate the sector to higher levels of technicality and value added, it started falling off. In 2006, our exports of goods amounted to 33% of our GDP; by 2016, it fell to 19.3% of GDP and is estimated at 18.2% for 2017. Thus, over the past 10 years, the contribution of our exports of goods to GDP dropped by almost half, given fierce international competition in a free-for-all international trading system and insufficient drive to help it produce newer goods and penetrate additional markets.

Mutual destruction and Dominance by the Few

For the moment, we don’t have clues how to improve the performance of our export of goods sector. At the same time, we are assaulted by a battery of controls as well as international naming and shaming we stand exposed to, as regards exports of international financial services as a compensating source of foreign exchange earnings.

Can a freer international trading system help us get out of the tight corner we’ve fallen into? It could, because this is what has helped our economic development when multilateral global trade started being liberalised as from 1982. This is not only true for Mauritius.

History shows that trade, political and economic dominance by certain powers has spurred them on to greater heights which they keep occupying even today, as it was the case during the centuries of global colonial exploitation.

It is estimated that Asia occupied a 65% share of both world GDP and population way back in 1600. Europe at that time accounted for some 20% of both world GDP and population. By 1913, however, on the eve of World War I, while Asia’s share of global population still remained around 60%, its world GDP share had shrunk to less than 20%. What caused this shift?

In the intense inter-country rivalry for power within Europe, the latter had colonised all the other continents – Asia, Africa and America. It employed its colonial dominance via industrialism, imperialism and trade (including the slave trade) to exploit and impoverish the non-Western countries. During this period, what to say of colonial countries like Mauritius, even the larger global economies in Asia and Africa lost their springs of growth due to sustained and intense colonial exploitation. Those others which were peopled by the colonisers and their off-springs moved up the scale however.

The European rivalry for power which had led to their mutual destruction by the end of WW II in 1944, caused new international institutions (UN, IMF, World Bank, the General Agreement on Tariffs and Trade (GATT), later the WTO) to be created. The aim was to restore order in the chaotic global situation that had ensued. Even then, the aim was not to create a better sense of sharing among all the colonial and emerging post-colonial economies.

The international institutions were intended to resolve conflicts among the Western powers and had little to do with righting the wrongs done against the non-Western countries. The First World countries – US, Western Europe, Canada, Australia, New Zealand and Japan – dominated the world. They eventually accounted for 60% of world GDP with only 25% of the world population.

The new world order

Left behind by the First World countries, emerging new countries on the global stage struggled single-handedly, making major structural transformations and introducing domestic economic reforms to catch up with those at the top. It is the context in which they fought to be given a place at the table of the new international trade regulating body, the WTO founded in 1995 and successor to GATT. The WTO’s aim is to make internationally agreed rules to simplify and harmonize customs and trade procedures across countries in the fields of agriculture, industry and services.

After several rounds of trade negotiations and policy implementation under the aegis of the WTO, developing countries have gained quite some ground in international trade.The WTO Ministerial Committee meeting of Doha in 2001 adopted the pursuit of the twin objectives called the “Development Agenda” and the “Trade Dispute Settlement Mechanism”.The latter is in place but the “Development Agenda” was blocked by the “Quad” countries – US, Canada, EU and Japan in Cancun, Mexico, in 2003. We are forced to abide by decisions others take or don’t take.

Since 2003, barely much progress has been realized at the WTO level, there being almost perpetual conflicts around subsidies that the stronger countries give to their exporter producers to penetrate markets to the disadvantage of potential other exporters from other countries. So, not much is expected to be achieved at this week’s ongoing WTO Ministerial Committee meeting (10th to 13th December) in Buenos Aires, Argentina.

In the face of this frustrating situation, groups of countries started gravitating towards regional trade agreements – i.e., to the exclusion of other countries not forming part of the bloc -, e.g., the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), etc. After this, the new American president has come on stage. He has not only put to rest some of the regional trade agreements involving the US; he may even give the coup de grȃce to the existing free multilateral global trade system, to a point where many suspect the world currently stands on the brink of a global trade conflict. This can be highly risky for an economy like Mauritius.

The way forward

Reckoning with this situation and given our shrinking exports of both goods and services, how can Mauritius react? It cannot punch above its international weight, for sure. It cannot also continue fudging up as in the Betamax case, taking on unnecessary risks with essential supplies.Here, instead of dealing once and for all with and straightening out the core issue, it has been adopting temporary measures to get over the consequences of a gaffe committed in the past.

Mauritius’ efforts may be better directed to increase its exports of both goods and services, overcoming the international trade market condition fraught with multiple risks. As seen from the past, trade can make or break the economy. For this, our public institutions could be enabled to take well-calculated trade decisions to grow the export space of the country with sustainable alignment of potential partner-country interests. A lot of repair work may need to be done to give back to public institutions the autonomy they deserve in this context to think and act wisely in the long-term national best interest.